Quantile-based modeling of scale dynamics in financial returns for Value-at-Risk and Expected Shortfall forecasting

We introduce a semiparametric approach for forecasting Value-at-Risk (VaR) and Expected Shortfall (ES) by modeling the conditional scale of financial returns, defined as the difference between two specified quantiles, via restricted quantile regression. Focusing on downside risk, VaR is derived from the left-tail quantile of rescaled returns, and ES is approximated by averaging quantiles below the VaR level. The method delivers robust, distribution-free estimates of extreme losses and captures skewness, heavy tails, and leverage effects. Simulation experiments and empirical analysis show that it often outperforms established models, including GARCH and joint VaR-ES conditional-quantile approaches. An application to daily returns on major international stock indices, spanning the COVID-19 period, highlights its effectiveness in capturing risk dynamics.

Authors

Publication Details

Journal
International Journal of Forecasting
Published
2025-12-01
DOI
https://doi.org/10.1016/j.ijforecast.2025.12.002
Citations
1
Primary Topic
Financial Risk and Volatility Modeling
Type
article
Field-Weighted Citation Impact
2.21

Funders

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article

Quantile-based modeling of scale dynamics in financial returns for Value-at-Risk and Expected Shortfall forecasting

Xiaochun Liu, Richard Luger
1 citations
International Journal of Forecasting
Financial Risk and Volatility Modeling
2.21
article

Quantile-based modeling of scale dynamics in financial returns for Value-at-Risk and Expected Shortfall forecasting

Xiaochun Liu, Richard Luger
article en
1 citations

Abstract

We introduce a semiparametric approach for forecasting Value-at-Risk (VaR) and Expected Shortfall (ES) by modeling the conditional scale of financial returns, defined as the difference between two specified quantiles, via restricted quantile regression. Focusing on downside risk, VaR is derived from the left-tail quantile of rescaled returns, and ES is approximated by averaging quantiles below the VaR level. The method delivers robust, distribution-free estimates of extreme losses and captures skewness, heavy tails, and leverage effects. Simulation experiments and empirical analysis show that it often outperforms established models, including GARCH and joint VaR-ES conditional-quantile approaches. An application to daily returns on major international stock indices, spanning the COVID-19 period, highlights its effectiveness in capturing risk dynamics.

International Journal of Forecasting
Social Sciences and Humanities Research Council of Canada
Openalex Percentile: Top 9%
Financial Risk and Volatility Modeling
2.21
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Quantile-based modeling of scale dynamics in financial returns for Value-at-Risk and Expected Shortfall forecasting — Xiaochun Liu, Richard Luger · International Journal of Forecasting (2025) | TGRS Research Map | TGRS